Week Ahead | JP Morgan Chase

16 January 2023

Good morning and welcome to our inaugural “Market Thoughts”, our newsletter covering Blackbull Research’s house views on broad-based market themes on the week that’s been and the week ahead. Let’s crack into it.

CPI

CPI print last week and the market reacted by continuing its steady upwards tick. To wit – stocks that were left for dead in ‘22 have seen a double-digit rally this January. Carvana (CNVA), a debt-ridden stock with questionable management that we wouldn’t touch with a ten-foot pole, ticked up ~55.31% in the past five days alone. Bed Bath and Beyond (BBBY), a favourite meme stock of Reddit’s WallStreetBets, ticked up 136% in the span of five days — one could be forgiven for thinking it is 2020 all over again.

We tend to think this is an outsized reaction. The discount rate the market had applied to equities last year was relative to expected earnings decreases; whilst some equities were oversold we don’t think a double-digit increase in what is traditionally a positive month for equities is a reliable sign of what’s to come. CPI was roughly in-line with expectations, coming in at 6.5%. Bulk of this was due to fuel prices declining (~4.5% impact) whilst the core categories we look at – food, groceries, and meals out all decelerated modestly (100-200bps). We pay a lot of attention to how these very inflation-sensitive categories respond because they give us a better idea of what the economy is doing stripped of extraneous data like used-car sales. We caution getting too excited over this data. Two points, and one chart:

  1. Core CPI still rose 0.3% which annualises to 4% – double the Fed’s 2% target. A 0.1% decline isn’t enough data to do a proper read-through — equities are still pricing in a “soft landing” when we haven’t seen the lag from the Fed’s tightening and its related effects on the housing market (i.e. mortgage repayments).

The job market remains secularly tight. See below – initial jobless claims coming in at ~205k. If anything, this is a slight decline for the short-term. Historically for a recession to occur claims need to hit +400k. That’s a key signal for indicating if the Fed’s policy of tightening to reduce wage growth, which in turn reduces inflation, has worked.

We still think the possibility of a “soft landing” is very unlikely

The following chart is illustrative of the risk which is posed within consumer spending. We’ve seen a big decline in non-durable goods and durable goods, yet services inflation remains persistently and stubbornly high. We think about this data in combined with strong wage growth + strong employment, which does not bode well for a decline in services inflation. The Fed’s stated mandate is to reduce inflation, so we do not think a reduction in total rate hikes is likely – smaller rate hikes only mean the cycle will continue for longer. JPow is going to continue tightening the screws until we see real pain.

“Transitory Goldilocks”

A good way to think about the first half of ‘23 is that we’re in a kind of ‘transitory Goldilocks’ — conditions are just right for bonds + equities to stage a short term comeback – a lower CPI is enough of a trigger to stoke retail flows whilst institutional flows will take advantage of volatility. We think there are short-term opportunities to take advantage of the market’s bullishness yet caution against any long-term plays — the long-term trend remains down. Short-term bullish equities; long-term bearish for ‘23 at this point.

Bank earnings

The major banks reported their earnings last week. They’re telling a different story to the market. At JPMorgan (JPM) CEO Dimon noted that the cost of deposits is likely to increase in ‘23, meaning net interest income is likely to come in at $73B – well below analyst’s forecasts of $75-77B. The issue is interest: consumers are leaving JPM in search of a better interest rate for their deposits. They’re going to have to pay to win customers back. JPM has ~$1B set aside for the possibility that borrowers might fall behind on their loans whilst the big banks collectively have set aside ~$4B for credit related defaults. We remain BUY-rated on JPM, viewing it as the most well-equipped bank to deal with a nasty recessionary environment. BUY-rated JPM; fade other US banks.

Disney faces off against another activist

Disney (DIS) had one activist last year in the form of Dan Loeb – he agreed to a standstill agreement after the house of mouse acquiesced to some of his demands. We saw the return of veteran CEO Bob Iger. And now, folks, Iger has met his nemesis in the form of veteran activist Nelson Peltz. Peltz went on a media blitz last week – amongst his comments Disney is a “company in crisis” with “a flawed streaming strategy” and “ongoing self-inflicted wounds”. Tell us what you really think, Peltz.

Peltz has an established M.O: go on the offensive, humiliate the target company and then establish a list of demands whilst shoring up proxy support. Proxy battles are expensive! Peltz’s biggest battles have bled companies of tens of millions. Then, when the company is exhausted, Peltz makes an agreement with management and suddenly becomes best of friends with all in the C-suite. Peltz has a mixed record. His record at companies like H&J Heinz and Proctor and Gamble paid off handsomely, whilst his record outside of consumer companies – General Electric, for instance – has been spotty at best. Peltz’s GE stake ended up being worth about 25% of what Peltz paid for it. Most commenters have pointed out that Peltz has very little media experience and the return of Bob Iger is exactly with DIS needed in the first place: we tend to be skeptical of any value Peltz may lend Disney’s board, but think short-term Peltz’s involvement may juice the stock price. DIS has long been our favourite media stock and we continue to reiterate that – BBR has recommended both WarnerBrothersDiscovery (WBD) and DIS. WBD has returned +37% YTD and DIS has returned +11% YTD. Recommend increasing exposure to DIS.

Portfolio positioning + stray thoughts

We recommend remaining net cash with limited equities exposure. Major earnings the following week – expect to hear from Microsoft (MSFT), Visa (V), Mastercard (MA), Costco (COST) etc which will give us more colour to how far ahead expected earnings contractions are. We saw very little from the mega-caps last quarter – we expect consumer spending to continue apace for MA and V whilst we are looking for slow-down in the cloud segment + per seat licenses for big tech (ADBE, MSFT, AMZN).

New Zealand Market Movers 

The New Zealand market (NZX 50 Index, +0.8%) was up strongly on Friday, following a strong lead from Wall street. Pacific edge rose +5.9% to fresh 5-month after confirming it has completed its commerical agreement with Te Whatu Ora – Southern to use its non-invasive Cxbladder genomic biomarker tests.

Australia Market Movers 

The Australian market (ASX 200 Index, +0.6%) climbed to fresh 6-week highs as commodity rally extends on optimism of China’s reopening.

What Markets will be Watching this Week (UTC +13) 

Tuesday 
AU Westpac Consumer Confidence Index Jan

Earnings from Morgan Stanley, Goldman Sachs, United Airlines

Wednesday 
Inflation Data Canada, and Great Britan

Bank of Japan Interest Rate Decision

Thursday 
Eurozone CPI (Inflation Data

US Retail Sales and PPI data

Earnigns from Costco, Proctor and Gamble, Netflix and Intuit

Friday 

Japan Inflation data

Good morning and welcome to our inaugural “Market Thoughts”, our newsletter covering Blackbull Research’s house views on broad-based market themes on the week that’s been and the week ahead. Let’s crack into it.

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